Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2023 Second Quarter Results Conference Call. I would like to hand the conference over to Lavonne Zdunich, Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome everyone to Precision Drilling's second quarter earnings conference call and webcast. Today, I'm joined by Kevin Neveu, Precision's President and CEO; and Carey Ford, our CFO. Earlier today, we reported our second quarter results. To begin our call today, Carey will review these results, and then Kevin will provide an operational update and outlook commentary. Once we have finished our prepared comments, we will open the call for questions. Please note that some of our comments today will refer to non-IFRS financial measures, and will include forward-looking statements, which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking statements, and risk factors, please refer to our news release and other regulatory filings. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated. Carey over to you.

Thanks Lavonne. Precision's Q2 financial results exceeded our expectations for revenue, adjusted EBITDA, earnings, and cash flow. The resiliency of our high performance, high value business model and organizational focus on cash flow and return on capital, drove our financial results and progress in strengthening the balance sheet. We have not yet reached our desired capital structure, but in the middle of 2023, we crossed a few milestones, including total debt below CAD1 billion, and net debt to TTM EBITDA below two times -- well below two times and cumulative debt reduction of over CAD1.1 billion since the beginning of 2016. Now, I'll move on to Q2 performance. Adjusted EBITDA of CAD142 million was driven by healthy drilling activity, improved pricing, and strict cost control and included a share based compensation charge of CAD3 million. Without this charge adjusted EBITDA would have been CAD145 million, which compares to a normalized EBITDA of CAD75 million in Q2 2022, representing an increase of 93%. Margins in the US and Canada were higher than guidance resulted from stronger than expected pricing and cost recoveries. Higher ancillary revenues and improved cost performance, in addition to $5 million in idle but contracted revenue. In the US, drilling activity for Precision averaged 51 rigs in Q2, a decrease of nine rigs from the previous quarter. Daily operating margins in Q2 excluding the impacts of turnkey and idle but contracted revenue were $15,455, an increase of $1,276 from Q1. For Q3, we expect margins to be approximately $15,000. In Canada, drilling activity for Precision averaged 42 rigs, an increase of five rigs or 12% from Q2 2022. Daily operating margins in the quarter were CAD12,203, a decrease of CAD1,355 from Q1 for Q2 -- sorry, from Q1 2023. For Q3 2023, our daily operating margins are expected…

Thank you, Carey and good afternoon. As Carey highlighted, I am also thrilled with the rapid progress we are achieving against our debt reduction and capital structure objectives and this progress is underpinned by the strong operating cash flows we are producing and should continue to produce. I'm equally thrilled with our recent contracting successes in both the United States and Canadian markets and more on that in a moment. Now, as some of the listeners may know, Precision has a large employee shareholder base, many of whom listened on our earnings calls. I'd like to recognize and thank every member of the PD team who are all dedicated to providing the safe high-value services our customers expect from PD while also tightly managing our costs, optimizing our margins and producing strong operating cash flows to the benefit of all PD shareholders. The results of the hard work achieved the highest second quarter cash flow in the company's history. Bravo to PD team. So, I'll start with our Canadian segment, which I've been highlighting for several quarters, but really stood out during the seasonally slow second quarter traditionally known as breakup. The Canadian market for conventional oil and gas drilling has radically transitioned over the past several years is perhaps now the best it has been. And by best, I mean the most stable and healthy that I've experienced during my career. No longer is the summer fall drilling program pinned on the AECO gas price realized in April, May. We now have visibility one, two and in some cases, three years out for Canadian drilling activity. The Trans Mountain project, the Line 3 expansion, and the coastal gasoline pipes are solving the basin takeaway constraints which have hung over the Canadian industry for the past decade. You can look…

Thank you. [Operator Instructions] Our first question comes from Luke Lemoine with Piper Stanley. Your line is open.

Hey, good afternoon. Kevin, pretty positive comments about the US rigs that are being signed to beginning in 4Q. Can you talk about the shape of the US or count? And do you think 4Q jump starts 2024? And then I just want to confirm, as you said, super spec demand could be at full utilization next year?

Look, we're actually quite surprised by how quickly our customers seem to be ramping up. They're thinking about 2024. It's primarily oil-based, but we've had also, I think, one or two rigs that look like to be contracted into gas, primarily in the Marcellus. But just looking at the profile right now, quick influx of lots of inquiries. We've signed the nine contracts we mentioned, primarily oil, primarily either large cap or kind of IOC style E&Ps. They are definitely planning to ramp up activity into 2024. And we're effectively kind of repositioning from the Haynesville into the Permian right now and really shifting our customer mix from what was largely private equity a year ago now to a lot of large cap public and IOCs in the Permian. And so as we watch that kind of play itself out. If we just look at the inquiries we have today, that looks like they'll turn into rigs, they not all for precision probably for the industry. That's why I'm thinking that over the course of 2024 we could see that sub-stack rig market will be utilized.

Got it. And then on Canada, you're sold out on Super Triples and singles and you talked about moving some from the US. What kind of duration can you get on these contracts? I know overall, you talked about seeing one to three years in Canada in term are you towards the higher end to move those from the US to Canada? Or how should we think about that?

Well, the way you should think about that is, number one, we want to see the marginal rate in that upper 30s range. So, that's really important. And the customer has to pay for that move in addition to the day rate. So whether we signed a two-year contract and pays for it over two years or signed a one-year contract in pays for over one year, I'm kind of indifferent but we do want a take-or-pay contract with fixed days. We want to have some certainty of revenue. We want to have a base rate for that base rig in the upper 30s, and we want low cost fully paid for by the customer. So, I'd say it's a fairly high bar compared to today's market, but the market is evolving quickly.

Yes, got. All right. Thanks a bunch Kevin.

Thank you.

Our next question comes from Aaron MacNeil with TD Cowen. Your line is open.

Hey everyone. Thanks for taking my questions. Kevin, if there's 27 rigs under contract in the US in Q4, what's the average duration? And if 43 you're currently active. Can you sort of characterize the remaining 16 or so rigs? I guess I'm wondering what sort of contract structures are they operating under, I assume well-to-well are they up for renewals? Do you have visibility towards continued work? There's obviously always churn, but just trying to understand how solid the current activity level is in the US today.

Hey Aaron, this is Carey. The contract book we've had over, call it, the last 18 months has been anywhere from six months to three years. But up until, I would say, a few weeks ago, the majority of the contract durations were six months. And we've seen more requests for one and two-year contracts, and we've recently entered into several one-year contracts. So, I think it's trending a little bit longer duration. And we're not really seeing as many customers looking for three or four well programs. They're longer term programs. So, I think it's a good indicator of future activity.

And the rigs that are sort of working today, but don't have long-term contracts associated with them?

Yes. So, those will either go into long-term contracts or they're going to switch hands to customers that are more interested in contracts.

And some of those renew on a well-developed basis with the same customer over and over.

Got it. You've highlighted the relative strength of the Canadian market again this quarter. If we compare generic or average 1,500 horsepower Super Triple in the US with generic 1,200 horsepower Super Triple in the Montney, which one is generating a higher rate of return today? And do you expect those rates have returned to change at all?

Aaron, that's essentially how we arrived at that upper 30s Canadian rate that rig in Canada. So, our costs in Canada in Canadian dollars or rates are Canadian dollars. So, the operating margin at upper 30s would be about the same that we're achieving in the US on those rigs on those 1,200 rigs in the DJ Basin.

Makes sense. I'll turn it back. Thanks guys.

Thank you.

Our next question comes from Waqar Syed with ATB Capital. Your line is open.

Thank you. Kevin, Carey, the IBC revenues in Q3, would those be -- still be around that CAD5 million, CAD6 million mark?

Probably be one or two rigs. I don't know if it will be that high, but it will be one or two rigs that we have in BC.

And how many rigs were in Q2?

Yes, I think we had two rigs.

You had two rigs as well. Okay. All right. And then -- so if you look at the US clean kind of day rate or revenue per day in Q2, roughly around CAD34,400. And the leading edge mentioned is in the low CAD30,000 to mid-30s. Is the leading edge in line with where the revenue number is? Or is it below what your revenue per day was for Q2?

Well, I think we've got a couple of things going on here. We have a little bit of softness going into continue from Q2, and then we're seeing strengthening in Q4. So, if you're talking about going back to Kevin's opening comments about where the leading edge rate is for Q4 and Q1 bookings. We've got rigs that are some rigs that are pricing as high as CAD40,000 all-in. So, that is one leading edge rate. And then if we're talking about where we've been quoting leading-edge rates for the last three months, I would say, we've been saying kind of mid to -- low to mid-30s, and we reported day rates of a little over CAD35,000 a day in Q2. So, they're kind of in line, I think, in this market.

Okay. So the CAD15,000 a day margin guidance for Q3, is that kind of the new floor? Or there is potential for margins to decline further into Q4 and Q1?

Well, part of what we have going into Q3 is just a little bit lower activity, so we have some more fixed cost absorption we have fewer rigs bearing the same similar fixed cost. So, that's part of the margin squeeze. And then if we see more demand and higher rates in Q4 and Q1, we'll see the more to go back up.

Well, that's pretty good. And in terms of incremental demand in the Middle East, how do you see that? When do you expect maybe -- you still have about five rigs idle in the Middle East in that international markets, how many could go back to work over kind of what timeframe?

Yes, I'm going to be a little vague on the guidance there, Waqar. We've got active bids for several rigs right now. I'd say that the most likely rigs go back to work first would be the one rig in Kuwait, and they go back to work in Kuwait or Saudi Arabia. It's essentially an AC Super-Sec rig in a [indiscernible] size, but I wouldn't expect that rig to be activated before the beginning of next year at the earliest. And we've been participating in a number of other tenders in the Middle East throughout several countries that just keep sort of getting punted down the road or delayed or slow plate. So, it's really hard to assess what the -- with the national oil companies are thinking around reactivating these tenders and turning those tenders into contracts.

Okay. And so if -- let's assume that you win a contract for a rig like from the day of announcement to the day that they are on revenues, is it like a six-month lag or less or more?

It'll be in the three to six-month range, and it would just depend on how much recertification work we have to do what their schedule was. They generally think about these things in anywhere from three months to one year, depending on the tender.

And what kind of incremental CapEx may be required to activate those rigs?

Well, it could be as little as a few million like maybe CAD8 million to CAD10 million per rig or it could be as much as CAD20 million to CAD25 million depending on the scope of work we have to do to meet the standard. But the day rates would be designed to recapture that capital within the first operating year of the contract.

Great. Thank you very much. This is all very helpful.

Great. Thanks Waqar.

Our next question comes from Keith Mackey with RBC Capital Markets. Your line is open.

Hi, good afternoon. I just wanted to start out. Many have been trying to, of course, kind of call the bottom on the US rig count and determine where it ultimately goes from there? Now, Kevin, from your prepared comments and in some of the, of course, Q&A, it sounds like you believe that we are close to there, given the comment around super spec utilization being fully utilized in the US through 2024. But can you just maybe give us a bit more clarity on why you think that the A, how close we are to the bottom in the US rig count in terms of activity for the industry? And then B, what gives you really the confidence, what are the two or three factors that you think will lead that rig count to ultimately be or the super spec rigs to ultimately be near at full utilization?

Keith, that's actually a very complex question, so I'll do my best here, and make Carey, if you can pipe into if you have any more thoughts. So, what I'm sure of is that Q2 was in the bottom. I'm sure of that. What I'm also sure of is that about 90 days after the bottom, you look back and say, yes, for sure, that was the bottom. So, there's a lot of uncertainty around trying to call it in advance. I think what we're looking at right now is we saw the surge of inquiries come in when the oil price stabilized. We bought commodity price is looking pretty good today. I mean we need to see a month or two or three of this be really confident. But it does seem like the problem wasn't CAD72 crude to CAD74 crude the problem was WTI dropping into the CAD60s and coming back out of the CAD60s, that uncertainty held back plans that have been in place even late last year to at rigs. I mean the inquiries are looking at today were ones we were actually contemplating back in November, December of last year. Now, they've come to fruition that the pricing to have stabilized. So, certainly, the market is doing better than it did even just a few weeks ago. It would be hard to imagine that in a world of CAD75 or CAD80 WTI, the rig count goes down much further. So, I was cautious in my comments around our rig count. Rep 43 today actually will be in this area through the third quarter. We could drop down a couple. We're going to be -- we're in a defend price, not utilization. So, if we have a renewal coming up, if somebody wants to keep that rig but cut the price by CAD5,000 a day, we'll walk away. So, I wouldn't be surprised if our rig count were to drift a little lower. But also if it stays flat at this level of moves up, that wouldn't surprise the other. How is that hedging my bets.

I think that covers it off pretty well. Maybe just on the new contracts that that you've signed. It sounds like given the pricing you've sort of directionally talked about, it sounds like you've been pretty successful despite the increased availability of super-spec rigs in the market. You've been fairly successful at getting decent pricing. Now, can you just talk about why that is? Like do you get a sense that these rigs are for customers who are drilling net new wells into 2024? Or have these rolled off some other -- from some other contractor and you've managed to pick them up?

So, these are net new wells that we would have been talking to customers about a year ago, last November, December, their 2023 plans that just got pushed back. But I'd say a second part. These are also customers who wouldn't be looking at some of the small drillers to do that work. So, we don't see the small drilling contractors that have a couple of super stack rigs as a competitor. These are really going to be focused on top three or four drilling contractors. The customers are looking at kind of -- like I was describing earlier in Canada, how our customers are shifting away from just pure rates looking at full value. So, I can tell you, every one of these rigs that we've contracted has alpha running on the rig from day one. That's an important factor for these customers. They also have our Clarity data solutions on these rigs where they want to get high-frequency data from us. So, these are sophisticated customers looking for a sophisticated drilling program and the leading day rate is just maybe a little less important than having the digital capabilities and the safety and the support we can provide.

Got it. And one more if I can squeeze it in. It looks like there's. In Canada, maybe five or so rigs doing direct LNG type of drilling now, how much more rig activity do you think is required for the current -- or to fill the current phase of LNG? Are we kind of there? Or do we need to see a few more rigs go to work. And is that working its way into your -- into your discussions as well?

So, it's probably more than five rigs that we have tied to LNG. I think the number might be closer to CAD15 million if you include everybody who's a partner in LNG Canada that we're drilling for and the other company that's announced LNG exports through the Gulf Coast. So, I think it's a larger number. But I can tell you, we're adding another rig in January. That's the upgrade we talked about a couple of quarters ago, it starts January 1st. I would be surprised if three to five more rigs are not required to satisfy the first two trains of LNG Canada. Now, that work will get done one way or another. We don't bring rigs out of the US to satisfy that or our competition doesn't do it. There may be some increased tele-double work. But the efficiency gains on a triple on a three-well pad or larger are just too hard to argue with. And our customers are so focused on capital efficiency, that will drive them into the triple direction away from the -- for the larger pads with the LNG style customers.

Yes, got it. Thanks very much.

Thank you.

Our next question comes from Cole Pereira with Stifel. Your line is open.

Hi all. So, obviously, on the Canada front, the contracts is quite the change in behavior from the E&P side. Do you just get the sense that some of the producers are getting very worried about rig availability, just given some of the LNG tailwinds? And can you talk about the length of some of the contracts that you've recently signed in Canada?

Yes, Cole, we -- it might be the wrong word. I think what they're trying to do is ensure they have the same crew and the same rig for a long period of time. So, it's a very collaborative effort. I know I've been involved in some of these discussions myself with our customers, but they've been highly collaborative, trying to make sure they can have the same drillers, the same rig managers, a very consistent, predictable operations. This year and next year, the year after. Contract durations have ranged from 1 year to a maximum of three years. The average is probably somewhere between one and two years for the contracts I wouldn't say our customers are worried. I said they're really focused on making sure they can control their operations with rigs and crews, they now trust and have confidence in.

Got it. Thanks. And on the US side, you talked about some of the public and super majors getting a bit more active over the next few quarters. how have conversations with some of the private producers been recently acknowledging the fact that the ramp in crude, it seems like has really been just the past week or two?

Yes. So, I think the difference is that the publishers are talking to and that we've been contracting with, likely we're looking to add rigs earlier in 2023, and that didn't happen. So, they have plans ready and when the price got in the right range for them, they're ready to go quickly. I think that the smaller companies don't do that kind of advanced planning, don't have that kind of structure, and they may wait a little longer and work with their private boards to get through some early cash flow bumps and then start looking at a rigs.

Got it. That's all for me. Thanks. I'll turn it back.

Thanks Cole.

Our next question comes from Kurt Hallead with Benchmark. Your line is open.

Hey good afternoon everybody.

Hey Kurt.

So, Kevin, I just wanted to follow on a little bit on the supply/demand dynamics in Canada. You kind of referenced in the call, you think demand is exceeding supply, and that could potentially lead to some rigs moving up from the US to satisfy that demand. So, just kind of curious as you might give some context around what do you think the shortage of rig capacity is right now in Canada?

Yes. Kurt, I can go back to what I know for sure. At the beginning of the winter in 2023, we had demand for five rigs that we couldn't satisfy and didn't satisfy. We know a couple of those were handled by tele-doubles drilling a little less efficiently. And then following that, the Blueberry resolution happened to BC. That seemed to push another three, four, five rig demand customers come to us. We actually move rigs back into BC. That seemed to push things forward. In discussion with clients today looking forward, it seems like most of that is still out there. And whether that's five rigs or seven rigs, it's a little hard to tell for sure. I do think that will put a bit of a pull on tele-double. If you look at the basin right now, there's probably already 15 tele-doubles drilling Montney wells right now or there has been historically. Some operators like the lower rig cost, but most operators are drilling medium to larger pads through the economics pretty quickly and determine that even at a CAD35,000 or CAD37,000 a day rate, a rig that can drill a well, 40% faster, makes a lot of sense. So, I think that math will work its way through the system. I'll be shocked if any rig targeting LNG sales gas is anything less than triples rig. So I think five to seven rigs is kind of how we see it, which is why we think we might be pressed to bring one or two rigs up in the US, maybe late this year or next year, early next year, maybe more.

Okay. All right. And obviously, you gave the economics as to what would incentivize precision to make that happen. So, it just now comes down to the sense of urgency at the E&P company level. So, we'll have to see how that shakes out. Okay. So, the other question I had was you kind of referenced some longer-term contracts and obviously, this is a unique situation for Canada. So the question would be, how many Precision rigs do you think could be on three-year type contracts, if that's the duration as you kind of look at the needs for the LNG pipelines are coming on. Just kind of -- just want to see if this is just a kind of a unique dynamic or if there is a growing -- a definitive growing need to lock in rigs for longer term?

We had a number of discussions with customers about two and three-year terms. I would say that we were reluctant to lock in too many rigs in those longer terms because we were -- we're still trying to get rates up a little more. And I made the comment that we won't get back to earning -- out earning our cost of capital, which we think is an appropriate thing to do for a business that's so capital intensive like ours. But we still think rates in Canada move up a little further. Our customers have work to is quite well, and I'm really pleased with the job that our sales team has done and our customers have accepted increases. But I'm not prepared to lock in at these rates for two or three years down the road.

Yes. Okay, fair enough. So, a follow-up question here on the alpha ads and software and everything else. So, it seems like there's definitely a growing market penetration and adoption rate. What can you talk to in terms of the stickiness and the dynamic of the alpha. So, once it's on at rate, does as an E&P company say, well, again, that was kind of a nice little toy, but I don't need it anymore. So just kind of give some perspective on what you're getting the feedback from the E&Ps?

Kurt, we haven't had any customers turn off alpha and stop paying for it. They're all renewing contracts paying for it. We're on these long-term contracts we signed in Canada and the US every single rig that we signed on these long-term contracts include alpha. I'll tell you what we're actually really focusing on right now is I think we have an app library of about 30 apps and our utilization has been a little less than we'd like. So, we're really focusing now on working with our customers, testing our apps join them and trying to prove the value of each app. I think we have a pretty good runway to get wider scale adoption over the next few quarters. We've got a number of apps that really help assist drilling performance, drilling consistency drilling repeatability, even as simple as measuring emissions and they all make good sense. We just need to do a better job fully proving that value out to our wide customer base. And kind of remind me if you may, what's the kind of average rate that you get for deploying these apps on a rig?

Kurt, if you remember, it's about CAD1,500 a day for the base system and then the apps would be anywhere from CAD200 a day to about CAD1,000 a day per app.

It's like kind of almost evolving into a Software-as-a-Service type of business. Is that fair?

Well, sort of. But remember what I'd be we're not selling software, we are selling a drilling operation. And we're trying to really support our ability to drill wells efficiently, safely, consistently, predictably, repeatedly. So, the software is designed and intended to support that service, not be a product on its own.

Got it. Okay, that’s great. Appreciate the color.

Thanks Kurt.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Lavonne.

Thank you, everyone, for joining our conference call today. If you have any follow-up questions, please do not hesitate to contact me. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.